EMU: Elevated inflation adds pressure to the ECB – UOB

Economist at UOB Group Lee Sue Ann assesses the latest inflation figures in the euro area and its potential impact on the ECB’s policy.

Key Takeaways

“Eurozone CPI rose to an all-time high of 8.1% y/y in May, up from 7.5% y/y in Apr. The acceleration was driven by food and energy largely affected by the impact from Russia’s invasion of Ukraine. Core CPI rose to 3.8% y/y, up from 3.5% y/y in Apr.”

“Since the Apr meeting, however, widespread comments from doves and hawks alike, suggest that the European Central Bank (ECB) will hike rates as soon as Jul, an option (among several) clearly favored by the hawks in Apr. Following the recent rhetoric from the ECB, 25bps moves in Jul and Sep seem like a done deal.”

“But we are also unconvinced of aggressive hikes at the ECB and believe that the process of monetary policy tightening will be gradual and far less sizable than financial markets are currently envisaging. We will be finalizing our forecasts following the next ECB meeting on 9 Jun, likely looking at two 25bps hikes this year and then a pause, with two further 25bps increases through 2023.”